Do You Really Want the IRS to Do Your Taxes?

Appeared In: The Centre Daily, The Cleveland Plain Dealer, Smart Pros, The Sun News, The New Hampshire Union Leader, The Korea Herald

The federal income tax is a pain in the neck. The tax code is 70,000 pages long, nobody actually knows all of what’s in it, and even simple tax situations are complicated.

Between 1040s, W-2s, 1090s and year-round record-keeping, the average person spends more than 26 hours a year doing taxes. That’s more than half a work week. There is an obvious solution to this problem: Simplify the tax code.

Unfortunately, neither Republicans nor Democrats have much interest in a simpler tax code. Both parties have riddled the tax code with social engineering projects and targeted tax breaks for politically favored interests.

Worse, while common-sense simplification remains politically difficult, a very bad idea seems to be gaining traction: to have the IRS fill out taxpayers’ returns for them.

A return-free income tax has some superficial appeal. Austan Goolsbee, chairman of President Obama’s Council of Economic Advisers, has argued that it would save time, hassle and money for people with relatively simple tax situations. And it’s already been tried in California and in the U.K. Just look over the pre-filled return the IRS sends you, sign it, and you get a refund check. Easy.

Or not. The IRS rarely has all the information it needs to fill out an accurate return for any one individual, household or business. People change jobs. They have kids. They get married and divorced. They buy homes and cars. Who knows what kinds of deductions they qualify for? The IRS probably doesn’t.

And if the IRS makes a mistake on your return, you would be liable for it. If you want to stay on the right side of the law, you would have to calculate your own taxes anyway, to make sure the IRS got it right. So much for saving time.

If anything, a return-free system would likely add to the cost of complying with the tax code. The IRS would need to collect a lot more information than it currently does. Stricter reporting requirements for employers and other third parties would cost at least $500 million, and as much as $5 billion, according to a study by Joseph Cordes, of George Washington University, and Arlene Holen, of the Technology Policy Institute.

Even if a return-free system were to save time and money, it would create other, bigger problems. One is the obvious conflict of interest in having your tax collector also act as your tax preparer.

The U.K.’s experience with a return-free system makes this plain. Over a two-year period, almost 6 million people received erroneous returns as part of Britain’s Pay as You Earn return-free system. This is an alarming error rate — almost 15 percent — for a program with 40 million participants. And coincidentally or not, those errors are systematically stacked in the government’s favor. Her Majesty’s Revenue and Customs service estimates that, on net, the PAYE program overcharged taxpayers as much as the equivalent of $370 million in 2009. This is a 148 percent increase from 2008.

It is unclear if overcharged taxpayers will receive refunds. Those who underpaid, however, will be required to pay for the government’s mistakes. The BBC reported in September that 1.4 million taxpayers who underpaid are now on the hook for an average of $2,200 each. That is a month’s pay for many people.

California’s ReadyReturn program suffers from a different problem: Hardly anybody uses it. About 2 million of the state’s taxpayers with simple tax situations are eligible to participate in ReadyReturn. In 2009, 6 percent of them used the program. That is up from 3 percent in 2008. Officials will be pleased if participation tops 8 percent in 2010.

Taxpayers, it seems, just don’t trust the government to do their taxes for them. Between widespread incompetence and systematic anti-taxpayer bias, they have little reason to.

It is heartening that officials are looking for ways to reduce the burden of doing taxes. But a return-free system would treat only the symptom, and poorly at that. The root problem is an arcane, 70,000-page tax code.

The solution is to simplify it.